The past decade has been earthshaking for the global payments industry, and the changes show no sign of stopping. The consumer side has seen the rise of payment apps like Venmo, Zelle and ApplePay, along with an increasing reliance on e-commerce and mobile payments driven by the pandemic. On the institutional side, the rise of open banking has been intertwined with a new regulatory landscape defined by evolving standards such as ISO 20022 and PSD2 and 3.
But these innovations have had a marginal impact on correspondent banking systems. The primary focus of most of these improvements has been the user experience. On top of that, their biggest impact has been on regions that were already well-connected in terms of payments, such as the ACH structure in the United States. Even as the domestic rails have developed new technology and messaging systems, the correspondent banking system has failed to keep up with modern needs.
Seeking Efficiency in Cross-Border Payments
One of the systems that has been lagging as a result of all this change has been cross-border money movement. Cross-border payments still largely rely on the correspondent banking system, which means that settlement speeds have seen little to no improvement in recent years. Thanks to fluctuations in foreign exchange (FX), higher interest rates, and intermediary fees, global payments have become increasingly more expensive.
All these changes make it even harder for modern institutions to access certain critical payments corridors. This is on top of historic factors that have already made these corridors difficult to reach because of lack of FX or liquidity challenges.
Although many fintechs have attempted to solve the pain points of the B2B payments experience, not many have attempted to address the challenges that banks face at a fundamental, infrastructural level. But for those that do, there is a tremendous opportunity to use better, alternative solutions that can transform the management of correspondent banks from a cost center into a revenue driver. The latest technological offerings enable companies to offer innovative payment solutions for customers, expand business into new corridors, and gain a competitive edge as client expectations rise.
Trends That Are Driving Adoption
Money movement has increasingly become digital in nature, a trend that has only accelerated. McKinsey has estimated that U.S. account-to-account (A2A) payments could surpass $200 billion in volume by 2027. Visa has reported that 87% of U.S. consumers are using open banking to link their financial accounts to third parties, even though only 34% are aware that they are using it. In the UK, A2A payments already represent 45% of all electronic payments and are growing by 280% annually.
In fact, several trends point to money becoming an increasingly digital commodity. Cash usage is at a historic low, with the number of Americans saying they did not make a purchase with cash in a typical week is now at 41%, up from 29% in 2018. And more individuals and businesses are using alternative currencies. The cryptocurrency market tends to top $300 billion in trading volume per day, not far behind the average U.S. stock market, which averages about $460 billion per day.
Technologies That Can Fill the Gaps
Although these trends mean more assets are moving electronically, several headwinds are hindering this system from being as efficient as it could be. A major problem with payments today lies in the difficulties banks encounter when they transfer data from one account to another or one jurisdiction to another.
Though the ISO 20022 standard aims to implement a “universal language” for payments messaging, it is a different story for cross-border payments, where the experience is still poor. Correspondent banking networks remain slow, expensive, and opaque, resulting in high intermediary costs and long settlement times for regional and community banks, largely due to the complexity of correspondent banking relationships.
Learning About Solutions
One solution for this data issue is distributed ledger technology. This allows banks to send and record transactions instantaneously, with no more need for payments reconciliation or manual data entry. Distributed ledger technology helps institutions reduce network complexity, provides alternative options to Swift or ACH, and helps companies and their customers make faster, more affordable payouts.
As technology and regulations continue to develop rapidly, it is critical to not fall behind. Ripple, a leader in cross-border payments solutions, helps banks take advantage of these developments. The company will be delving further into this topic in an upcoming webinar, Evolution in Global Payments: Rethinking Correspondent Banking for Modern Finance, which you can register for here.
The webinar will cover:
- Industry wide progress in payments across North America
- Why the correspondent banking system is no longer fit for purpose
- How regional and community banks can prepare for the next evolution of global payments